Real Estate: Tips for the Intrepid

Even though housing prices are still falling, some bargain hunters are already getting to work. What takes patience these days is the financing

Is it safe to venture back into the property market? Some real estate pros are switching into full bargain-hunting mode even as home prices continue to fall nationwide. But if you're tempted to join them in bottom-feeding, look out. Not only is there a chance home prices will fall more and not recover for years, but even seasoned professionals are struggling as they try to work out deals.

Among the bargain-seekers is Jim Gillespie, president and chief executive of Coldwell Banker Real Estate. In April he closed on a 35-year-old, three-bedroom, two-bath ranch house just south of Santa Rosa, Calif. A year and a half ago the seller paid more than $450,000; Gillespie got it for $320,000. He wasn't trying to make a killing: "The way I look at it, I got a fair market price," he says. "I'm not saying it will go up to $450,000 overnight, but it's going to be a good investment. People shouldn't try to time the market."

Gillespie purchased the house for his son and family (they're renting it from him) in what is called a short sale. Here's how it works: A lender allows a property to be sold for less than the total amount due on the mortgage and any other loans on the property. If a homeowner has a $300,000 mortgage but the house has sunk in value—the most it can fetch is, say, $250,000—the bank can choose to forgive $50,000 of the mortgage to get the property off its books. For homeowners, short sales offer a way to avoid foreclosure and still pay off their loans by settling with the lender. Negotiations take place between the buyer and the bank.

The transactions are complex, and Gillespie waited five months to hear that his offer was accepted. It was only then that he learned from the bank that there was a second mortgage on the home he hadn't known about. "We had put this much time into getting this house that [we decided] we could wait longer," he says. Luckily, Gillespie ultimately wasn't asked to pay more to cover the mortgage. "To our surprise, the decision by the second-mortgage holder to waive their stake took less than two weeks," he says.

Another real estate insider trying to get a deal through a short sale is Mark Durliat, CEO and co-owner of Grace Bay Club, a resort in the Caribbean islands of Turks and Caicos. He's wading into the battered Miami market to buy a second home, and it has been a deeply frustrating process.

Durliat, who spends about 30% of his time in Miami, found his dream home through a real estate broker about five months ago. It's a luxury condominium on Brickell Bay Drive, with three bedrooms and an ocean view. He expects to pay about $1 million on a property he figures is worth $1.6 million based on the prices buyers were paying for properties identical to his in the same building two years ago. "My position is that it will require three to four years to reach this value, which suits me fine," Durliat says. It will take that long for the Miami market to work through its glut of inventory, he adds.

Durliat has spent more time than he bargained for negotiating—"actually, waiting to negotiate"—a price. It often takes several weeks to get a response from the seller's bank every time a change to the offer is made. "This has been a brutal exercise," he says. "If you are not patient and you are desperate for a home, this certainly isn't the way to do it." An even bigger frustration, however, is financing. In June, Durliat lined up a mortgage to cover 70% of the purchase. Now his bank, JPMorgan Chase (JPM), says it will finance only 60%, so he needs to find a new lender.

Financing is also proving to be more of a hassle for Paul Johnson, the ex-mayor of Phoenix. He now runs a homebuilding company called Old World Communities as well as a distressed-property investment fund. He's looking for a vacation property in the mountains of Colorado to buy with three of his brothers. They plan to use it for vacations six times a year and rent it out the rest of the time.

The Johnsons have made three offers on Telluride properties in six months, including an $8 million offer for a home listed at $9 million last year. Although nothing has panned out so far, Johnson expects they will need to put up to 50% down instead of 10%, which would have been the norm a year ago.


Anil Pereira, founder of SecondSpace, which operates Web sites that connect second-home buyers with sellers, has a different strategy for picking up bargains. He's focusing on raw land in resort areas. "Raw land often sells at a discount since most impulse buyers—people who fall in love with a recreational area while on vacation—find it hard to envision what a home on that property will look like," he says. Financing won't be an issue, says Pereira, since he plans to do a cash deal. And since the land is undeveloped, taxes should be low.

In late July, Pereira spent his vacation evaluating waterfront properties in the Gulf Islands of British Columbia. He is also looking at lakefront lots in North Carolina and northwest Florida, which are selling at 10% to 25% discounts when compared with prices a few years ago. If prices start to climb, he says, the value of undeveloped land should move in lockstep.

Not everyone is taking a speculative approach to the drop in housing prices. With one son nearing college, Dave Sears, co-founder of OptHome, a real estate site that helps sellers and buyers find experienced brokers, figures it's a good time to downsize. In March, Sears and his wife, Lucia, sold their 4,900-square-foot home in Southborough, Mass. The house, which had been on the market for 16 months, sold at a 13% loss, and the couple bought a brand-new home in the neighboring town of Northborough. Sears figures they'll recoup their money in just a few years because the Northborough property is 1,000 square feet smaller. "I'm saving money every month, not just on the mortgage, but also on the landscaping, homeowner's insurance, heating and cooling bills," Sears says. A big savings comes from taxes: His annual bill will be about $7,000 less.

Although their original home took a lot longer to sell than he expected, what surprised Sears most was the assistance he got from the builder of his new home—who was also the builder of his old home. To help Sears ready the old property for the closing, the builder agreed to fix the roof and a hole in the garage ceiling, as well as a few cracks in the basement's foundation. He also replaced a window and finished a vent in the attic. Sears figures these free repairs saved him about $2,000 in contractor fees. Purchasing a home in this market is "a lot like buying a 2008 car model this coming fall," Sears says. "Because the market is slow, there are extra concessions available—you just have to ask for them."

For some investors, opportunities in real estate don't even involve bricks and mortar. Dionisio Meneses Jr., co-manager of the $193 million Schwab Global Real Estate Fund (SCHW), owns properties in his personal portfolio. He's negotiating the sale of his interest in a commercial building in the mid-Atlantic region he has owned for several years. But instead of using the proceeds to buy another building, Meneses is considering investing in real estate securities instead. "Right now the opportunities are in the equity and debt side of real estate," where there's more liquidity, and it's easier to diversify, he says.

Meneses sees the best real estate deals in the mortgage-debt arena, where high- net-worth investors can buy into distressed-mortgage-debt funds, typically via their financial advisers, for as little as $50,000. "You have to take a contrarian view right now. That's where the money can be made," he adds. Still, don't expect to see his mutual fund stocking up on mortgage debt: "My fund is not as aggressive as I am."

Editor's Note: "Tips for the Intrepid" (Aug. 18) mistakenly stated that Paul Johnson, the former mayor of Phoenix, and his brother submitted a deposit on a Telluride (Colo.) vacation home selling for $3.5 million, down from $9 million a year ago. Mr. Johnson made a $3.5 million offer for a $4.3 million home and an $8 million offer for a property originally listed at $9 million. Neither offer was accompanied by a deposit.

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